安捷倫 (A) 2001 Q2 法說會逐字稿

AGILENT SECOND QUARTER EARNINGS CONFERENCE CALL

Good day everyone and welcome to Agilent second quarter earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Director of Investor Relations, Mr. Hilliard Terry. Please go ahead Sir.

Thanks and welcome to Agilent's Q2 conference call. With me are Ned Barnholt, our President and CEO, and Bob Walker, our Chief Financial Officer. Today, we will review Agilent's results for the second quarter and the format will be as follows. After my introductory comments Ned will provide his perspective on the quarter, and Bob will go into more detail on operations and our financials. After that we will take your questions. In case you haven't had the time to review the release you can find it on our website at www.agilent.com. Before we get started, I want to cover a few housekeeping items. We will host a security analyst meeting at our facility in Santa Clara, California on Thursday, May 24, 2001. Please contact the investor relation's team if you have questions you would like to register. As indicated in our press release, we announced in November, a definite agreement to sell our healthcare business to Philips. Today we have received EU Commission approval and are currently working through the process with the US Department of Justice. We will not report this continued operations until we receive the appropriate regulatory approval. So everything we discuss today will be in the context of our existing structure, which includes the Healthcare Solutions Group. We expect to complete the proposed transaction this summer. And finally, I would like to remind you that in our prepared remarks and our answers to your question, we will make forward-looking statements that involve risks and uncertainties. These risks and uncertainties could cause Agilent's results to differ materially from the management's current expectations. For a complete description of these factors we encourage you to review Agilent's report for the first quarter-ended January 31, 2001, on form 10-Q in the annual report on form 10-K for the year ended October 31, 2000. Let me turn it over to Ned at this point.

Thanks Hilliard. Hello everyone. We appreciate you joining us for today's call. Over the next few minutes, I will offer my perspective on a challenging and complex quarter. When we reported our Q1 results in February, we described the slowdown in the communications and semiconductor markets that reduced our order growth. As we entered Q2, this slowdown accelerated dramatically and it was made worse by a large number of cancellations. Frankly, the speed and the severity of the downturn are unlike anything I have seen in 34 years in the business. This quarter's weakness in our Test and Measurement and semiconductor product businesses was widespread. Our total orders of $1.8 billion include the $500 million in order cancellation that we had. They reflect this weakness. While the industry downturn was the defining event of the quarter, the full picture of our performance is a lot more mixed. We increased revenue by 10% over a strong Q2 last year. The Life Sciences business had a solid quarter. We made ¢11 per share with $100 million of above normal inventory reserves reducing our earnings by about ¢15 per share. Our general and administrative expenses declined, thanks to the actions we are taking to reduce our cost structures and short-term spending. The root of the industrial slump that drove our Q2 results is excess inventory incapacity that are almost universal among our customers, especially in the manufacturing segment of the communications and semiconductor markets. While we have been surprised by the sharpness of the downturn, these imbalances of capacity and demand will certainly be corrected overtime and the imbalances do not affect-----

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Gentlemen your line is open, please go ahead.

We apologize, we have been having technical difficulties. We are going to have Ned start all over again.

Sorry about that, let me start again. So thanks again for joining us on today's call. Over the next few minutes I will offer my perspective on a challenging and complex quarter. When we reported our Q1 results in February, we described a slowdown in the communications and semiconductor market that reduced our order growth. As we entered Q2, this slowdown accelerated dramatically and was made worse by a large number of cancellations. Frankly, the speed and the severity of the downturn are unlike anything I have seen in 34 years in the business. This quarter's weakness in our Test and Measurement and Semiconductor product businesses was widespread. Our total orders of $1.8 billion including the $500 million in order cancellation we had reflect this weakness. While the industry slowdown was the defining event of the quarter, the full picture of performance is a lot more mixed. We increased revenue by 10% over a strong Q2 last year. The Life Science business had a solid quarter. We made ¢11 per share with a $100 million of above normal inventory reserves reducing our earnings by about ¢15 per share. Our general and administrative expenses declined, thanks to the actions we are taking to reduce our cost structures and short-term spending. The root of the industrial slump that drove our Q2 results is the excess inventory incapacity that are almost universal among our customers, especially in the manufacturing segment of the communications and semiconductor markets. While we have been surprised by the sharpness of the slowdown, these imbalances of capacity and demand will certainly be corrected over time, and the imbalances do not affect the underlying drivers that make communication --

Mr. Barnholt your line is open. Please go ahead, Sir.

Okay and thank-you everybody. Sorry for this and I guess in addition to no power in California, we have problems with our telephone systems as well. So let me try to pick up where I left off. Hopefully, you've heard some of this already, but let me just pick up and say that this quarter, the difficult business climate led to wide ranging actions to reduce expenses. At the same time, our determination to build Agilent for the long-term led us to preserve critical investments to build the company for the future. I would like to review both of these areas briefly. We have taken actions to lower spending and mitigate the impact of the downturn. We have frozen hiring. We are not replacing people who leave the company. We have reduced travel spending by 50% since the end of Q1. We have lowered the number of contractors and temporary workers that we used by 50%. As you know, we announced a temporary 10% payroll reduction about 6 weeks ago. This action took affect on April 1st for our top 200 managers and on May 1st, for other Agilent employees. A salary reduction is the fastest way to reduce expenses, and we expect to save $70 million per quarter from this action. While we are fully aware of the difficulty this causes for our people, I am encouraged by the fact they are continuing to come up with ways to cut cost and help the company through this difficult period. In addition, we did not make any first half payouts under the company's variable pay programs. We designed these programs to give us the ability to reward people when the company does well and reduce expenses during difficult times. I am pleased that our variable pay programs are working as they were intended to. Finally, we have been permitted a short-term manufacturing closures and other time-off programs. We have moved a number of people in manufacturing, R&D, and sales from businesses where we have excess capacity to areas where we need more people. All the actions I have mentioned help us achieve a very good outcome on expenses this quarter. At the end of Q1, we said we expected expenses to increase by about $100 million in the second quarter. In fact, we kept expenses pretty flat this quarter with a nice decline in general and administrative expenses offset by a planned increase in R&D. I think the actions we took and the impact they had on expenses show how our approach makes a lot more sense for Agilent than and across the board layoff. We are aggressively managing expenses on many fronts. We are working hard to keep our regular workforce in key programs for our growth in place. Our people and our ability to innovate are essential if we are to capitalize on the upturn that we all know we'll arrive at some point. At the same time, that we acted to lower spending, we decided to move forward with our work to build Agilent for the future. We have a number of initiatives underway for sometime to streamline our operations and make Agilent even more customer-focused. The business slowdown is an opportunity to accelerate a number of these initiatives. For example, we are stepping up our work to consolidate manufacturing at a smaller number of strategic sites. We are making progress on other transformation efforts as well. Today, we have taken substantial cost out of IT procurement, human resources, and other essential functions. Along today, our Chief Operating Officer will have more to say on these efforts at our security analyst meeting next week. So, we are working hard to manage through the downturn, while we continue to invest in the company's long-term success. The key is innovative products and technologies and we are doing all we can to preserve our investments in R&D and new products. At this point, I will conclude with a few thoughts on our outlook for the rest of the year. First, it's clear that Q3 will be extremely challenging. The incoming order rate in Q2 was weak and we have now shipped a good portion of the backlog we built over the past year. We will continue to manage expenses aggressively and take cost out of system where we can. At this point, we expect Q3 orders, revenue and earnings to be down substantially compared with the same period last year. It is quite likely that revenue will be well below the Q2 levels that we reported in today's announcement, perhaps as low as $2 billion depending on the rate of incoming orders. As a result, we would have a loss of ¢20 to ¢30 per share on an EBG basis in the third quarter. This range includes the impact of restructuring charges of about ¢5 per share we expect to take in Q3. It is obviously very difficult to make predictions with a lot of confidence in this environment. We believe we are at or near the bottom of the downturn and we may see an upturn in orders later in the second half. We are continuing to work on short-term expense controls and cost reductions. If we get any modest increase in orders, we could return to profitability in the fourth quarter. We are staying in very close touch with our customers and are monitoring the business environment carefully. We are prepared to take further actions if conditions warrant. While we are clearly unhappy with the prospect of a loss in Q3, I want to reaffirm the importance of the balance I have spoken about today. We are going to do everything we can to maximize our results in Q3 and Q4. At the same time, we will maintain our core investments and technology innovation, new products, and the operational transformations that are vital to our future. That future still looks very bright. The development of next generation communication networks, the progress and understanding the genetic basis of disease and health are fundamental market drivers that remain firmly in place. We are determined to contribute to these advances and to fully capitalize on the opportunities they present. We have outstanding products and technologies, and we will stay focused on bringing innovative products to market. We have leadership positions in many markets and we believe that overall we are gaining or holding our market share. Finally, we have the global presence and people it takes to weather the current downturn and emerge a stronger company. I look forward to seeing you next week at our meeting in Santa Clara. Thanks again for being on the call today. At this point, I will turn it over to Bob.

Thanks Ned. During our conference call last quarter, we described Q2 as likely to be a very challenging quarter and it sure was. With the weakening order situation, we had to work hard to achieve the $2.7 billion of revenue. With this revenue and our expense reductions, our earnings were ¢11 per share, even with an increase of inventory reserves of $100 million above normal. As Ned mentioned, the second quarter falloff in orders was much more severe than we've experienced during any other period. At the end of Q1, when asked how I felt about this downturn, I said, I thought the one in Asia in 1998 was worse. My view now is very different. This was the biggest, sharpest, most severe plunge I've ever seen. The order rate kept getting softer each week during the quarter, and the softness included cancellations and push-outs of delivery dates. Many customers cancelled purchases of capital equipment or pushed them out for future delivery. Cancellations are unusual for us and we haven't talked about them in the past. Our policy is only to report orders when customer plans to take shipments within six months. This quarter, we had about $500 million of cancellations in communications and semiconductors, compared with about $40 million last quarter. We expect cancellations to be closer to $100 million in Q3. We said all along that orders are the best indication to future revenue and health of the business. So Q3 looks very challenging and as Ned said, we are taking a number of aggressive actions to achieve the best possible results. Now I'll review the key financial points for this quarter. Total orders declined 41% over last year's strong second quarter and on a sequential basis orders were down 37%. Excluding Healthcare Solutions orders were down 47% year-over-year and down 43% sequentially. Orders were down in all businesses year-over-year except Healthcare and Chemical Analysis, sequentially the only positive order growth was in healthcare. By geography, orders in the United States declined 46% year-over-year. Europe was down 35% in dollars and 29% in local currency. Our Asian business declined 35% in dollars and 32% in local currency. Year-over-year second quarter revenue increased 10% to $2.7 billion, which reflected shipping much of the extra backlog accumulated last year. Adjusted for currency, revenue increased about 13% from last year. Sequentially, revenue in dollars declined 3%. Q2 revenue included $136 million from the sale of a tranche of the portfolio of leased assets to CIT. In Q3, we'll account for the final piece of about $45 million. Excluding Healthcare Solutions revenue was up 11% year-over-year and down 7% sequentially. Net earnings were $51 million or ¢11 per share before goodwill and excluding the $269 million gain on the sale of land in San Jose, $27 million of HSG divestiture expenses and taxes associated with these items. Our profitability is well below normal because of lower revenue with higher cost of sales. Our cost of sales was 58.5% this quarter compared to 51% in Q1. There were two main reasons for this increase - one was an increase in the reserve for excess inventory of $100 million over normal rates or 3.5 points. This increase was based on our best view of user and usage. At the end of the quarter, we took a hard look at our inventory in the light of lower billed plans that reflected the incoming order rate. We feel our inventories are now correctly valued. Compared to last quarter, inventories were fundamentally flat. The second reason for higher cost of sales was unabsorbed manufacturing overhead as we operated well below our production capacity to avoid increasing inventories. This amounted to another $100 million or 3.5 points of revenue. We expect continued unabsorbed manufacturing overhead in Q3. Now I'll review Q2 orders and revenue by business. Test and Measurement orders declined 47%, year-over-year and declined 42% sequentially. Revenue increased 19% year-over-year but declined 2% sequentially. Earnings from operations before goodwill for Test and Measurement were $123 million this quarter. Last year, demand was very strong from our manufacturing customers who represent a large segment of our Test and Measurement business. This quarter, however, many of our manufacturing customers have excess capacity and don't need additional equipment. As a result, cancellations were very high in Test and Measurement in Q2 about $340 million. In this segment, R&D, installation and maintenance, and network management are stronger than manufacturing. Customers are placing orders for test equipment for base stations and emerging technologies. They are also buying equipment and software to implement and manage increasingly complex and heterogeneous networks. In the communication test piece of T&M orders were down 36% year-over-year and down 38% sequentially. During the quarter, we saw weakening demand for optical test equipment used by manufacturers of optical components and equipment. Orders in this area had remained strong until the second quarter. This weakness does not reflect any change in our market position, but reflects much lower demand from our customers. Revenue for communication test increased 37% from Q2 last year and increase 3% compared to last quarter. Orders in the general purpose, part of test and measurement declined 43% year-over-year and 36% sequentially. A large part of this segment includes sales to contract manufacturers which saw low activity. Because these sales are driven more by capacity than technology, we expect them to be soft for the next several quarters. Revenue growth, in general purpose, was flat compared to last year and declined 9% sequentially. As for the semiconductor test area, orders declined 91% from Q2 last year and were down 83% compared to last quarter. All geographies and product lines had double-digit order declines. The SOC business was impacted most significantly. This business has been through two recent waves of slowdown. Orders were low in Q4 '00 because customers found they had purchased too much equipment in the previous few quarters. Demand improved somewhat in Q1, but orders dropped dramatically during Q2 consistent with the overall industry turndown. In semiconductor test, revenue was down 16% year-over-year and sequentially. A positive sign for future business is in Q2; we recorded 44 design wins worldwide at 26 design houses in integrated device manufacturers. Approximately 25 previously reported design wins went into production in the first half. Now, I'll move to our semiconductor products business. Mirroring a trend seen throughout the semiconductor industry. Orders were down 68% compared to last year and declined 64% sequentially. Cancellations hit all business segments and totaled $161 billion. Revenue declined 11% over the same quarter last year and 26% sequentially. The second quarter loss from operations before goodwill in the semiconductor products was 83 million as we aggressively reduced inventory levels to adjust the changing business conditions. This compares to earnings from operations before goodwill of $59 million last year. Although, we had projected soft Q2 orders in semiconductor products, we didn't expect the downturn to be this severe. In Q1, our customers were speculating that this would be a mild capacity correction. Instead, inventory adjustments took place throughout supply chains in contract manufactures at higher than anticipated cancellations. Orders for networking and computing components were down 92% compared to the second quarter of last year and down 93% sequentially. Fiber optics, our largest generator of orders in previous quarters received the highest level of cancellations in Q2. In storage area networking, Tachyon and physical-layer ICs were hit hardest. In spite of the severe short-term downturn there are positive long-term developments. We launched our 2 gigabit per second fiber channel storage products, including both fiber optic and IC offerings. We also added to our networking ASIC design wins, and we led a new multi company initiative to define 2 gigabit per second Ethernet fiber optic transceivers, a market that had a lot of potential. In this segment of networking and computing components, revenue increased 7% over last year, but declined 22% sequentially. Orders for wireless semiconductors decreased by 88% from Q2 last year and 85% sequentially as customers continued to adjust their inventories. Revenue for wireless semiconductors increased 35% year-over-year and 45% sequentially. This quarter, we announced FBAR design wins with AirPrime for its new CDMA Springboard module developed for the Handspring Visor and with Samsung for its new CDMA Watch Phone. Imaging orders are down 39% year-over-year and down 10% sequentially. Excess inventory remains in the supply chain for the PC digital camera, the optical mouse, and printer ASICs. However, moving ahead on imaging technology that offers lower power consumption and higher resolution, our third generation optical chip powers the new Logitech cordless optical mouse. Revenue from imaging components declined 8% year-over-year and declined 23% from last quarter. So to sum it up, the segments I just covered, Test and Measurement and Semiconductor products make up Agilent's Communication and Electronic business, which is about 80% of our company. For these two segments, orders declined 53% this quarter, and revenue increased 11% year-over-year. Now I'll turn to our other businesses. The transformation of our Chemical Analysis business continues to progress consistent with our objective of achieving double-digit growth this year. Orders increased 10% compared to the same quarter last year and at a normal seasonal decline of 11% sequentially. Life Sciences had strong year-over-year growth, while the market with gas chromatography continues weak. In Chemical Analysis, a lot of the growth was driven by products that we introduced during the past year. Revenue increased 12% year-over-year and 9% sequentially. Earnings from operation before goodwill in Chemical Analysis increased almost eightfold year-over-year at $34 million. On May 1st, we named Chris van Ingen as Senior Vice-President and General Manager of our Chemical Analysis Group. Because he previously was Vice-President of Sales, Support, and Marketing, Chris knows the business well and has hit the ground running. He is very focused in taking advantage of the opportunities and continuing the transformation in Chemical Analysis. In Healthcare Solutions orders increased 4% compared to Q2 last year, and were up 9% sequentially. Revenue increased 6% compared to last year and increased 24% sequentially. Reflecting the restructuring we did last year, the healthcare business is on track with our plan to return to profitability. Earnings from operations before goodwill were $10 million compared to a loss of $25 million in the second quarter of last year, and a loss of $24 million in the first quarter. There is positive order momentum across many product lines including patient monitoring, cardiac resuscitation solutions, and customer services. We are pleased with the improving trend in patient monitoring business. Orders for ultrasound imaging declined compared to last year due to softening demand and price erosion in a highly competitive marketplace. This quarter, we became the first company to receive 510(k) clearance from the FDA to market an AED for use in children. When equipped with specially designed pads, our Heartstream FR2 could be used on infants and children under age eight. During our conference call in November, we said that because of the sale of HSG to Philips, we will be left with some expenses associated with infrastructure activities that were previously allocated to HSG. Our best estimate of the maximum annual exposure continues to be less then $200 million. We'll be working with our teams in Philips to minimize the impact of this overhead. Now, lets move to the overall earnings statement. We've already talked about the cost of sales and gross margins, so I'll move on to expenses. During our conference call last quarter, we said that we expected expenses before goodwill to increase about $100 million between Q1 and Q2 reflecting salary increases that were effective in February 1st, FICA tax increases, reduce vacation time, the impact of acquisitions, and expenses for new product introductions. Actually, this quarter our expenses before goodwill and divestiture costs were essentially flat versus last quarter reflecting a number of expense management actions including our variable pay program. Compared to last year, expenses were up by 6%; reflecting our commitment to new product development, R&D spending was up 28%. SG&A spending, however, was down 3% year-over-year consistent with our plan to lower SG&A in our business model. Within SG&A our original plan was to hold general and administrative expenses flat for six quarters. We now expect them to decrease. I want to mention again that we've reinvested some of the savings we've realized from our transformation programs to further growth opportunities and improve operational efficiencies. Our ELT project continues to go well, but there is a lot of work ahead of us before we see the benefits. Our operational tax rate remains at 33%, our year-to-date GAAP tax rate increased from 40% to 48% due to a higher ratio of non-tax deductible goodwill to pretax earnings. In terms of the bottom line, our net profit margin before goodwill and onetime items was 1.9% of revenue. Now, I'll turn to key points on the balance sheet. As you may recall, DSO was at 74% in Q3 last year. Triggered by that high number, we put a very intense effort on accounts receivable. We're now very pleased that accounts receivable decreased by $236 million from the last quarter and DSO decreased from last quarter 68 days to 63 days this quarter. Fundamentally, collection performance is stable, and we feel very good about the collectibility of our receivables. Inventory turns increased from 2.7 in the first quarter to 3.1 in the second quarter. It was a particularly difficulty task given the rapid and significant drop in demand. We billed inventory in the first quarter, and we've adjusted our bill plans to reduce new purchases in inventory levels in the second half. Now, let me give you some additional information for your financial models. In terms of PP&E, two quarters ago we had a plan to spend about a billion dollars in FY 01. After taking a hard look, we cancelled and pushed out our capital spending on maintaining a balance similar to what we described in R&D. We now expect to spend about $800 million in FY 01 on PP&E expenditures, which is a $100 million less than we told you last quarter. Our FY 01 depreciation an non-goodwill amortization will be about $350 to $400 million. We expect net interest expenses to be about $20 million for the second half. Finally, I'd like to emphasize what Ned said about the actions we've taken in this difficult business cycle. We're cutting back in many areas, but we won't sacrifice critical long-term programs for short-term earnings. Thanks for joining us today and now I'll turn it back over to Hilliard.

Operator, at this time we are ready for questions.

Thank-you gentlemen. Today's question and answer session will be conducted electronically. At this time if you would like to ask a question, please signal by pressing '*' '1' on your touch-tone telephone. Once again, the signal for a question press the '*' key followed by the digit '1' on your touch-tone telephone, and we'll take our first question from John B. Jones from Salomon Smith Barney.

Hi. It's Cindy Shaw. I think John Jones is on the line with me. I wanted to get some more color on exactly what types of inventory had been written off?

Okay, Cindy. Really it was in the areas where we felt, of course, there wasn't going to be any further usage and as you know a lot of our products have good long demand times, and so it's less likely for us probably that we're going to have inventory that really is excess and we are not going to use, but there are some cases where we have new products that are being introduced in the future that really limit the ability to use up existing inventory and that's where we've made most of the adjustments and it was in basically both the Test and Measurement area as well as Semiconductor products and it was really a product-by-product basis that we did the analysis.

Okay, John do you have any questions?

Yeah, I do. I quite frankly don't understand the optical market. Earlier this week Acterna announced optical transport business was up over 90% and the outlook was quite strong. There have been a number of other optical players who have mimicked maybe not the numbers, but the trend. Can you put some color on why you're seeing such weakness when a few others aren't?

Yeah, John let me comment on that. First of all, if you look at our revenues in the second quarter, we also had very significant growth in our optical business. I don't have the exact percentages, but it was very, very high in the second quarter of the year, but at the same time our incoming order rate has dropped off, mostly because the manufacturing capacity expansions and a lot of the network equipment manufacturers has stopped. They have enough capacity for a number of months to come based on the purchases they made last year. So, the weakness we see primarily is in the manufacturing area, predominantly in capacity buy. We still see orders going to R&D, we still see orders and installation and maintenance, which is on the service provider side, but frankly, we haven't focused as much on the installation and maintenance market as a company like Acterna, that's been their main focus, whereas we have tended to focus more on the network equipment side.

Their manufacturing, okay.

Correct me on that, the manufacturing side. On the revenue basis we're still seeing significant growth.

All right. Secondly, how long are you prepared to keep your 10% payroll reduction? And would someone comment on what the status of the Philips transaction is?

Yeah. Regarding the 10%, I really don't believe that we can extend that beyond the second half. The actions that we're taking now and in some of the restructuring that we will be doing in the third quarter, will in fact lower our cost structures going forward. So, we feel that by Q4 and going into next year, we will be able to have lower cost structures even if business levels stay at a fairly low level. So, we do not plan to extend them beyond the second half and we'll be watching incoming order rates very carefully. If it looks like orders are beginning to turn up in the third quarter, then we would remove the 10% at the end of the third quarter. Regarding the sale to Philips, we have, as you know, completed the approval process in Europe. We are still working with the Department of Justice. This is a very slow process as you can probably imagine. I think it's probably made a little worse because of the changeover in administrations here, but we are continuing to negotiate with them, work with them, provide them information, and we still expect that we will receive the approval in the next couple of months and be able to close the deal sometime this summer.

Okay, thank-you.

Okay.

We'll go next to Deane Dray with Goldman Sachs.

Yes. Just a followup on John's questions there, Ned, if I could. In particular, we heard from some of your competitors that there had been some weakness in the R&D market under Test and Measurement. The first question is - in particular you said you've had revenue growth there, but at the margin and actually how does the business feel in the R&D sector?

Well, I think it's probably more relative. R&D is down compared to where it was last year and where we expected it to be, but it's a lot healthier then the manufacturing side. You know, last year people were just building capacity like crazy for 10-gigabit or 2.5-gigabit optical systems, that's pretty much come to a halt. What we are expecting and where we see a lot of activity now and going forward is in the 40-gigabit activity, that's still going on in R&D. We still think there will be a roll out of 40-gigabit equipment later this year rolling into manufacturing late this year or early next year. So, we are seeing reasonably good orders from the R&D side, but again down probably from where they were, but a lot healthier than manufacturing.

Just wanted to comment on optical testing as well. We participate in two parts of manufacturing both in network equipment manufacturers, which of course have really pulled back, but also optical component testing which is even a different point in the supply chain and their orders are also down very significantly.

And the next question would be, Ned, in your prepared remarks you talked about your sense that you could be at the bottom and you've got cautious comments that you could see a modest upturn in the second half. Could you provide just some more data points as to what you're seeing currently today in either order trends or requests per growth or just in terms of what might be changing at the margin that will give you some confidence to say that you might be seeing an upturn?

Well, I think the one area that seems to be stabilizing somewhat is the computer industry. Last fall, we started to see a weakness in the computers and peripheral market, that certainly impacted our business in the first half, but we are getting indications that there will be some purchases going on in the second half in that market as they gear up for fall sales or Christmas sales, so we're more optimistic around the computer industry. Also, just talking to some of the communication customers and networking customers and even some of the semiconductor customers. There are technology roles going on out there. I mentioned 40 gigabits. There are some new PC chips coming along later this year that can't be tested with some of the current generation of test equipment out there. So, we are starting to see activity for some of those things. People can only hold off so long before they buy new equipment to test some of their new products. I think the out and out capacity buys, people that are just going to go expand capacity are probably not going to happen until next year, but we are starting to see increased quotes from a number of companies for our test equipment. We are also starting to see some increased activity or be it small, but some increased activity in our semiconductor products area, relative to what we saw in the first half, and again our expectation here is the level of cancellations will drop off. We had, as we mentioned, $500 million of cancellations in Q2. We expect, we will continue to see some level of cancellations in Q3, but at a significantly reduced rate below that, and of course that will let the gross orders look a lot more attractive.

Yeah. Thank-you.

We will go next to Richard Chu with SG Cowen.

Thank-you. A couple of things, Bob could you go through the cancellation of resolution 340 in T&M and 161 in SPG. Give us a sense of, if you can of how you might allocate that between the 3 or 4 major sub segments within those? And then I have a follow on? Thank-you.

I would see if we can get some more information on that. My memory, Richard, I think we had about $70 million in semiconductor test. I think some of that was probably in the board test area as well. Adjusted for that our book-to-bill there probably is more like 0.5, which is nothing to ride home about, but is certainly a little bit better than we saw before. I don't think, we have got a lot of resolution in SPG, but as I mentioned, I think it is really is in the networking with computing area. That's really where a lot of components were piling up, as you can imagine there are a lot of key manufactures that have cut back pretty severely there. Again, going forward, as Ned mentioned, the areas that have the most change in technology, certainly the PC business with new BUS structures and those sorts of things and some of the router technology, we would expect to see those components come back. So, we really cancelled the current generation and it's going to take a while to refill another's. The other two areas of Test and Measurement, it's largely in the communication-related area, although we did get some of our cancellations as I mentioned, and I don't the magnitude efforts, but we are $10 or $20 million in the board test sort of testing in what we call general purpose.

When you talked in the release about the possibility of getting back to profitability in Q4 depending on the order picture, what level of breakeven revenues do you have in mind given the current structure of expenses and pricing etc.?

It's somewhere between 2 and 2.5 billion and I hate to be that vague, but it really depends on a lot of other things that we are working on in terms of both the expense structure we have, as well as what our bill plans really are in terms of that revenue going forward. And again, as we go out further, we expect to get more and more traction, our headcount levels will come down and then will have some savings there.

And if I can, I would like to go back to Ned, basically the question that was just asked. When you look at the possibility of an order materializing in the second half, [________________], which technologies and product segments do you expect to see leading this upturn, is that what you are focusing on?

Well, I think we do expect to see some additional optical orders in the 40-gigabit areas and some of the new technologies. Again as I mentioned, I think there will be some rollout there and frankly, there still is some spending going on in some of the service providers for rolling out some new equipment in their network. So, we are seeing some of that and we expect to see more in the second half. In the wireless area, it's mostly around 2.5G and some of the data services and wireless things like Bluetooth and others that are new technologies, and a lot of it's around the new technology. I mentioned in the semiconductor test, there are things like PC 266, which is a new higher speed bus for PC chipsets that is coming out later this year that can't be tested with a lot of installed base of testers. There is a lot of activity around that. We are seeing customers get interested now and buying systems and as Bob mentioned, we have seen a number of design wins in this last quarter in our semiconductor test, and some of those we expect to start seeing ramping in production this next half. In the semiconductor products, it's primarily in some of the networking areas. The 2.5-gigabit or 2-gigabit fiberoptics that people are upgrading their systems from 1 gigabit to some of the new 10-gigabit local area network, fiberoptic components, our FBAR and P amplifiers are really doing well. So, it's lot of these new technologies and new products, and I guess, one another point I wanted to mention that when we started the year, I mentioned that we expected this to be a record year for new products. We are coming out with a number of significant new products across our businesses, and in the second half that we are getting excellent early response from our customers about. So, I think some of this we feel is in our hands to get those new products out to customers as quickly as possible. We can't do a lot about the world economy, but we can go out and offer products that customers really want to buy.

Okay. Thank-you.

We will go next to Jay Deahna with Morgan Stanley.

Thank-you very much. Good afternoon gentlemen. Couple of questions here. The first one, I guess is for Bob. Bob, do you think that the second quarter was the net order trough and is it likely that net orders can be above 2 billion in the third quarter? And then I have got one other question.

Yeah. We certainly think so Jay. Again, the level of cancellations was very, very high. We just have never seen that before and frankly, those were orders that had been placed a while ago that got cancelled. One other thing that I want to emphasize to is, in some cases those were custom order cancellations. In some cases, we examined when the customer really wanted to take delivery, they push something down and our policy being very strict around this 6 months, we basically de-booked that. We didn't get a cancellation from the customer, but we only want to keep orders reported that are shippable within 6 months. So, that was another phenomenon we saw, but again frankly, there isn't a lot more in those old orders to be cancelled at this point of time. So, we think that just removing that will cause net orders to come up. We have not seen cancellations of newly placed orders.

So, 2Q was probably the bookings and book-to-bill trough for the cycle?

Yeah.

Okay. Two other quick questions, probably for Ned. Ned, on the Healthcare negotiations/information giving process with the DOJ, are there any major hang-ups or is there anything that makes you nervous about process or is it more kind of just letting it play out?

Yeah. I think it's really more letting it play out. When we got the second data request where we had to supply more information, we shipped, I think it was 100 boxes of information and it just took them a long time to wait through all that and frankly, up until several weeks ago, they were still reading documents. So, we are just getting to the point now where they are getting through all that and we are having subsequent discussions.

Given the restructuring that's been going on in Healthcare business. If you sell that business, lets say, it gets completed in Q3 or Q4, will the disposition of that business be accretive, dilutive, or neither for earnings for the company in 2002?

Well, I think if you look at the long-term profitability of that versus our other businesses, clearly, it has been below the average for the company now for a number of years. Now, that's not necessarily the case in Q3 as we work off some of this excess in the communication and electronic market. So, on a relative basis it's going to look a little bit better, but we tend to think that's a very temporary situation, but normally and particularly, when we get back to our '02 levels of revenue and expenses, Healthcare would probably continue to be below the average. Now, I should also caution you though as we mentioned that taking Healthcare out of Agilent does leave some overhang in our G&A expenses that we are going to have to work through. We don't know the exact amount of that because we are still negotiating service level agreements with Philips as to how much they want to continue to buy from us over what period of time for us providing services to them. So, our goal is to make that as low as possible, as soon as we have those service level agreements negotiated, we will be starting to disclose the discontinued operations, and we will have more information for you on just what the outlook is going forward without Healthcare, but you just can't take their revenue and cost structure out, there is going to be a little bit of an overhang there for a while.

Right, and finally a couple of nuts and bolts on that. Will there be any meaningful share account change for the company as a result of this disposition and then finally, Bob, what would the impact be on the balance sheet? Are you going to pay down all your debt and add the cash and to what extent will these things happen?

Yeah. First of all there is no change in the share account. Coming back to the dilution issue, obviously as they are profitable on an absolute earnings basis or EPS basis, it will be diluted as we lose that, but on a margin basis as Ned indicated, we expect our margins to improve and certainly over this next several years our top line growth rate will be enhanced by this, and our expectation at this point in time is that we would pay out the short-term debt that we have picked up for some of the other acquisitions this year and there are no specific plans beyond that.

Thanks very much.

Thanks Jay.

We will go next to Jay Stevens of Buckingham Research.

Yes, thank-you. I'd just like to continue along with some of these questions that the other Jay asked. It sounds like you are trying to tell us that $2 billion order rate level is possible in Q3 and at the same time you suggested that 2 billion in revenue in Q3 is about as low as it would go. So my question is this, do you need the 2 billion in orders in Q3 to make the breakeven forecast in Q4? It sounds like you were trying to suggest that breakeven in Q4 is 2 to 2.5 billion in revenue. I want to make sure I am hearing all these miscellaneous comments correctly. So, do you need 2 billion in orders in Q3 to get the breakeven in Q4?

We believe we need probably 2 billion or a little bit more than 2 billion in order to get to breakeven. If you go back and look at our Q2 numbers and you add the cancellations to the net orders that would put us at 2.3 billion roughly of gross orders before cancellations. We think we need to be somewhere in the $2 to $2.3 billion range.

Actually it is closer to 2.5 up there, I mean as opposed to 2.

All right. Let me ask just sort of another question. I heard a comment that there were some factory consolidations underway and that was all that was said. So, could you put a little bit more color on what type of factory consolidation and where worldwide would you be doing this? Does that mean you are closing the factory and moving work to another factory?

Yes, Jay, we have started this process actually last year when we announced some restructuring. In our Healthcare business we had announced a bunch of changes and how we do manufacturing. We did a bunch of restructuring in our Chemical Analysis Group. We closed our Palo Alto manufacturing, moved it to Little Falls, Delaware. We are doing similar things in our Test and Measurement organization and Semiconductor products. For example, we have already announced that we are getting out of manufacturing in some of our smaller sites like New Jersey, we have a very small manufacturing division there, we are moving those products either to Penang or somewhere in South East Asia, where we are outsourcing some of that manufacturing. We have announced some reduction in manufacturing in Colorado Springs and some other places where we have smaller manufacturing operations. The idea is to consolidate on several large sites like Sonoma County, Penang, Singapore, Germany, and Scotland. We have some in the Bay area here and try to exit some of these smaller sites just because of complexity of managing so many different manufacturing organizations.

Okay, just one tag along question on Europe versus the US. There has been commentary from other companies just as a general comment that even if the US flattens down in this quarter, our slowdown will be exported to Europe, and Europe may well decline in this quarter. Your revenue growth performance looked pretty decent, US versus Europe both in the mid single-digit range in Q2, any color on or any concerns on your part about the slowdown in Europe even if the US stabilizes?

Well, I think if you look at our results, we certainly have already seen a slowdown in Europe and Asia, and the general results for the 3 major regions of the world are fairly similar in terms of the total percent decline, US compared to last year were down 46%, Europe down 35%, Asia down 35%. So, we have already seen some of that impact happening. Now, I will say we have seen a little bit of an impact on currency too, and local currency Europe is down 29% versus 35% in dollars. There has been a little bit of a negative impact from currency there.

Yeah I was looking at revenue number rather than the order number, and the revenue number in the US was +4%, and in Europe was +6%. So, any slowdown in Europe proportionate to the US, I am just trying to understand whether we should worry a little bit more about Europe or not.

I don't think there is going to be any proportional difference. We are still shipping off some backlog, we are shipping the orders that we did get in the first half, and I think in general we are seeing these things all going about the same relative rate. They are more or less in sync across the world.

Okay. Thank-you.

We will go next to David Dusenbury with Credit Suisse First Boston.

Hi! guys. Listen I apologize for I am going to have to play the order question just one more time. What I have so far is $2.3 billion in gross orders in the quarter, 2.5 billion in orders in the third quarter, which gets you to breakeven in the fourth quarter. What I want to verify is that when you stated that you felt Q2 is the bottom in order growth, is that also the gross 2.3 number or is the 1.8 net number. In other words, are we looking for a decline in cancellations to see sequential increasing orders or are we looking for growth in gross orders?

Yeah, we think basically if the orders hang in there where they were in terms of the quarter, we will be in pretty good shape. In other words if the cancellations go away, the gross incoming orders hang in there about what we have seen already in the second quarter, then we are on track for the fourth quarter to return to modest profitability as we termed it.

Can you give me sense for the linearity of the orders in the quarter? How did you end up towards the end?

Well, we always end up with the last month stronger than the others, and indeed that was certainly the pattern we saw once again. It varies each quarter by things, and we haven't seen certainly any sort of sharp uptake, we haven't seen a sharp down take at the end of that. So, again I think it is not unreasonable with as murky as the conditions are and then again it really is hard to call these things at this point in time very precisely, but I don't think it is unreasonable at all for us to expect the cancellations will abate very significantly and will end up with a gross order level similar to and probably a little bit higher than what we saw in the second quarter.

Okay, and I just want to go back to the inventory write off question. These products that you went through product-by-product in Test and Measurement and SPG, is it possible that we will see these things come off the shelf and flow through the income statement at a later date or have they been marked off?

What we have done is we have increased our excess reserve. So this is different than other companies have announced a different form of inventory adjustment, and what we have done is we have gone through the inventory and taken what we think are prudent reserves against potential excess.

Okay, I understand and the last question is within the manufacturing portion of your Communications Solutions Group. You pointed out that it was the optical group that was showing some weakness in manufacturing. Can you talk a little bit about the wireless that was a theme that we have heard in the prior quarter? Can you give us a sense for how that looks at this point?

Of course. Sure, again it's the manufacturing exposure is certainly a general theme just as that was a terrific positive theme last year as those manufactures were really bulking up, and we certainly saw a falloff in wireless manufactures, cell phone testing, in particular, that occurred earlier in year, and we certainly haven't seen that come back. So that remains very soft. The new exposure in the second quarter was the optical component manufacturers as orders fell off.

Yeah, I think the last year there was just a lot of investment made by wireless companies to build the market share, grow market share, and clearly all that didn't happened so there is a quite a bit of excess capacity out there with the large wireless players. At the same time they are moving to outsource in contract manufacturing, which is also resulting in some excess equipment being on the market and a lot of uncertainty as to what people are really going to need. So we've seen a pretty significant slowdown in the manufacturing side of the wireless equipment manufacturers. Again, the new products, the new technologies, are still coming along. There is investment in service providers as well as in large manufactures for 2.5G and even some 3G at this point, but that's going to be a longer term.

Right. Thanks a lot guys.

Thank-you.

We will go next to the [________________] with Wellington Management.

Yes, my question has been answered. Thank-you.

Thanks [________________].

We will go next to the Stephen Koffler of First Union Securities.

Hi, this is Laureate with Steve Koffler, our questions have been answered. Thank-you.

Thanks Laurie.

We will go next to the Charlie Gawlak with Wit SoundView.

Yes, Good afternoon. I was just wondering if you could given the mix of the communication test business, I mean maybe over the past couple of quarters, may be more normal mix, a split between say manufacturing versus installation and maintenance? And then second, if maybe you could talk about the integration of all OSI. If there is any new wins there? Maybe talk about the pipeline and if that's helping you wins any of the new service provider business you talked about few questions ago.

I don't have any specific data on the mix I don't know. Bob.

Yeah, the mix generally, if you look at the 3 broad categories in communication test of R&D manufacturing and installation and maintenance, it's roughly split evenly across those two with probably a little bit more intensity in manufacturing. So 30-40 or 30 or something like that is probably pretty close.

And regarding OSI, we just started with the integration a few months ago. The overall integration of them into the company has actually gone well. The business level at this point is still reasonably low. It hasn't really turned up yet the way we had hoped, but the funnel is very full. We're getting an excellent response from customers. They are bringing us into deals that we would've never been in before. We're bringing them into deals, and we're very optimistic if that business is really going to have a strong second half. We continue to be very optimistic about the overall outlook for OSI as well as our network management solutions from Agilent.

And could you talk about any what do you think might be a possible revenue contribution there?

From OSI or the overall network management?

Maybe both, OSI and network management.

Well, I think when OSI was acquired, their revenues were round about 40-50 million or so, something in that ballpark. So obviously at this point there is no major up turn from the synergies yet, but it's too early to expect that to happen, but if you look at the overall business, we've said in the past that we expect this, going forward, to be a large part of our future. We think it can be a billion dollar business for us, long-term. Right now, between their business and our business we're in the several hundred million dollar range.

That's great, thanks.

We will go next to the Syed Haider with Frost Securities.

Hello, can you give us a feel for the sales activity in your high-end optical components that are targeted more towards the service provider market such as your pump lasers and optical switching matrix.

Yeah, on the pump laser, we are continuing to win deals. We unfortunately are not in the position to announce anything right now, but we're continuing to get very good response, we've introduced some new higher-power lasers recently. We're having good response from customers on that so here again, I think there is some good up side potential in that business in the second half as well as we see more activity in that area. In the optical switching as we said all the way along we don't expect the major revenue contribution from that business this year. It's a business where we've to design the switch fabric and that has to be designed into our customers in products, so in the case of Alcatel they have to design it into their switch. It is a huge technical challenge frankly, we're a little behind where we had hoped in terms of the availability of prototypes to our customers, but we're delivering units to customers. They are designing them into switches. We expect to have some demos at Supercom coming up in a month or so and we're still on track for production sometime late this year into next year.

Taken as an aggregate, what do you think would be the overall revenue contribution from such products.

Well, when we announced the optical switch, I think what we said is that we expect the optical switching market to be about between $700 and $800 million a year looking out three years. So then you can make assumptions that what kind of market share we can get 25% or 50%. I think it's a little bit early to tell, but it's probably somewhere in that order of magnitude.

Okay, another question. In addition to your manufacturing facility, your rationalizations. You also can contemplate that you will divest or discontinue operation in some of your non-core and non-strategic product lines and in your remaining businesses such as Test and Measurements, Semiconductor products, just to contain costs?

Well, we have actually being doing that all the way along. Couple of years ago, we sold off our video broadcast server business, our network synchronization business, last year we sold off some industrial automation products. We've even recently sold off a couple of very small product lines. So we're continuing to look at our portfolio to see if there are opportunities, but there is nothing major that we anticipated. It's all kind of very, very small things at this point.

Thank-you.

We will go next to the Daniel Kunstler with JP Morgan.

Hello, I'm just [_______________]. A couple of things, and I apologize if you answer me over and over taking it in another call. I am looking at your expectations for next quarter, your EPS expectations for next quarter, and if we exclude the ¢5 for restructuring, maybe a couple of pennies for the rest of the expenses related to the Healthcare. Where do you think are going to be the big concentration of earnings problems in this very quarter? Are there specific product areas where the operating margin is more difficult to maintain in the face of the revenue issue and the order issues and others?

Yeah, I think let me make a couple of comments and I'll have Bob jump in. If you look at our two most cyclical businesses, our Semiconductor products business and our Automatic Test Group business, you can go look at the competitors in each of those markets and you can kind of see what's going on. As we reported, we had a loss in our Semiconductor Products Group this past quarter, second quarter we have some fab capacity, although we have outsourced most of our fab activity, but we still have one fab that's running far below capacity underutilized, and we do have some fixed costs in those areas that are difficult to scale back on short term when the business really drops significantly as it does, and of course in the Automatic Test business, you see what others are reporting in that area and you can see the challenge of trying to maintain a profitable business with such a steep downturn in that business, so those are the two areas that are probably impacted the most. I think the other areas we feel that we are more on track. So I think again if you look at the industry, our results in each of those areas are not outlined what others you are seeing in those businesses.

Actually to follow on something related to that. Ned, you were speaking earlier about some of the [________________] areas that could read a recovery such as what you are doing in 2.5Gs, Bluetooth, and PC 266 and the like. At the same time, looking at the catastrophe in orders in this quarter, I don't think that is [________________] observation. What we are looking at is 91% decline in orders in ATE and networking is between at this point in time at 92%, and given the carnage of that in that particular segment, you seem to be rejecting any idea that that might actually lead the downslide given how far down it is, am I correct in interpreting that.

You know, I think in all of those areas though we do expect a recovery, mostly because we don't expect the same level of cancellations. As I have said we believe, we have taken the worst of the cancellations in the second quarter. We do have, compared to a lot of our competitors, a very strict 6 months booking window, and a result we actually de-book some business ourselves because things kept sliding from orders that we took even as far back as last year. We just were worried that we shouldn't even continue to count on those going forward. They may come back they may not. So if you assume the cancellations are at the low point, and we think that they will be reduced in the third quarter, we expect both the ATG as well as FTG to come back. In fact, when I mentioned earlier that we are seeing some firming in the computer market and a lot of that is related to our Semiconductor Components business. So I think we will start seeing a comeback in that area, which is one of the reason why we think we do have a chance for some slow or modest growth going forward in the second half.

Our feeling is that our customers have really done a pretty good job. They have been awfully traumatic of draining their excess inventory, and that process is largely completed and as we move forward, they will be buying new components. So we really see that probably the return will be lead in lot of ways by Semiconductor products even though they have been very severely impacted and again as a segment we are driven into loss position in the second quarter. They do have as Ned indicated a little more fixed cost. There is more leverage around that, but of course moves both ways, and we think as the component orders start to come back and that's turned into revenue we will see a return there early.

Which is one of the reasons why we think we will be returning to profitability in Q4 because we expect those orders will be starting to come in by the fourth quarter and we expect that some of the other cost reduction efforts we are taking will lower the fixed cost point and we will be back in a profitable position at least in the SPG business, which is the big part of the company.

Yeah, that seems pretty [_______________]. One other thing I was curious about if you tried to gauge how the downturn is spread from one geography to another, do you have any data that shows what the geographic spread is of the order cancellations? The theme there would be, well if the cancellations tended to spread to Europe then of course any recovery in US would therefore lag if you see what I am getting at.

Well I think Daniel, first of all lot of the cancellations as you can imagine were concentrated on contract manufacturers both in semiconductor as well as is other forms of manufacturing, and of course a lot of those have significant activity in Asia. Taiwan for a lot of the semiconductor houses in scattered in a lot of advantageous areas for the other contract manufacturers and that's really where we picked up a huge amount of cancellation, and again that's where a lot of the components are actually being used. They are being ordered on behalf of others that may be located at many places around the world. We just don't see that concentration of contract manufacturers in Europe.

Okay and the last thing, could you give me a fair idea how much are you still spending, approximately on a quarterly basis on the ERP system?

We really don't have that broken out and frankly there is certainly some of that as you can imagine is capitalized as we move forward with the license fees and others. We have an awful lot of people who are working on it, but the bulk of those people frankly are doing lot of other things at the same time. They are redoing the processes, but they are also keeping existing process going, which is in some ways why this is such a great time frankly for us to do this as the activity in sort of normal production is a bit reduced.

I still recall the times of the taking [________________] of the company that in aggregate spends about a quarter or billion dollars with new [businesses]. Are you still tracking to about that kind of expenditure by the time you get it completed?

We are running under our original targets for that project. At this point time is going very well from a spending and progress standpoint.

And again as Bob mentioned some of that is capitalized and some of it expense.

Okay, thank-you very much.

Thanks Daniel.

And we will take our final question from Ed White with Lehman Brothers.

Hi Adam Wilson for Ed White. I was wondering if you could comment a little bit on the Life Sciences business, I know you referenced that as an area of strength. Can you discuss some of the dynamics there, and your outlook for that segment of the Chemical Analysis for the next couple of quarters?

Yeah, last year we introduced a record number of products in our liquid chromatograph and mass spectrometer area. We are having really excellent results in those product lines, and then we are continuing to have very good response from customers with our gener A chips and our microfluidic products. The gener A activity has taken off very well. We are continuing to expand the number of customers that we work with. Perhaps you saw the announcement yesterday that we announced that we are starting to sell standard gener A chips using insights human genome DNA, so we are actually moving forward and having very good results with our customers in that market. So that business the Life Sciences piece of the Chemical Analysis Group is becoming a bigger and bigger part of the total. The chemical and petrochemical environmental markets continue to be mid single-digit growth rate businesses, so we are definitely seeing the top line driven by Life Sciences and as that becomes a bigger part that will accelerate the growth rate of the overall group.

Great thanks very much.

Thank-you.

And that does conclude today's question and answer session. Mr. Terry I will turn the call back to you for any additional or closing comments.

Thank-you, we apologize for the technical difficulties we had earlier, and we look forward to seeing you all in our analyst meeting next Thursday. Thank-you very much.